“Do you know what the real Net Present Value of your equipment is?”
“Do you know the real ROI of effective preventative maintenance?”
Here is a simple illustration of the type of analysis that would be conducted. Suppose a company owns a 10-year-old, 7-horsepower air compressor. Replacing the compressor would cost $32,900. Is an investment in preventive maintenance justified?
Based on best practices developed, the compressor will last 20 years with proper PM but only 16 years without it. Proper PM will cost $472 per year. Repairing the compressor will cost $944 per incident. If maintained properly, it will need to be repaired once every four years. If it is not maintained, the compressor will need to be repaired every three years. Given these variables, and assuming a time frame of 25 years, is an investment in preventive maintenance justified?
With preventive maintenance, the equipment will need to be repaired once every four years at a cost of $944, a figure that translates to $236 per year. Lacking preventive maintenance, the compressor can be anticipated to need repairs once every three years for the same $944 cost, which equals $315 per year. With preventive maintenance, the compressor will need to be replaced in year 10.Without PM, it will have to be replaced twice, in year 6 and year 20.
Comparing the two scenarios indicates that the PM scenario has a net present value (NPV) of $6,359. If the time period is extended to 30 years, the compressor will need to be replaced twice in the PM scenario. This reduces the NPV to $4,338. In either case, the investment in PM is clearly financially justified.
For purposes of simplicity, this example does not consider inflation, residual value, energy or lost revenue from downtime. If residual value (how much the compressor is worth after year 25) is factored in, for example, the NPV would decrease. But each of the other factors would cause an increase in NPV that would more than compensate for the effect of the residual.
Consider Three Scenarios for Preventative Maintenance Budgets
Scenario 1: No Preventive Maintenance
This option assumes that the organization spends nothing on PM. Obviously the cost of PM is zero in this scenario. The cost of repair maintenance, the cost of energy, and the frequency of equipment replacement will increase, however, because the equipment will not be properly maintained.
The amount of energy degradation and expected life degradation is based on the type of the equipment. It is also assumed that the frequency of repairs will increase in an amount similar to the expected-life degradation. For example, even with proper maintenance, a compressor would need to undergo minor repair every four years. The model assumes that this repair frequency will increase by 20 percent when the compressor is not properly maintained, adding additional repair costs over the life of the compressor.
Scenario 2: Current PM Levels
In this option, the cost of PM represents the actual amount spent by the organization at the time that an audit was conducted. For most types of equipment, significantly less was being invested than is usually recommended based on industry benchmarks and manufacturer suggestions.
In these cases, the amount of energy and expected-life degradation can easily be extrapolated between the no-PM scenario and the industry benchmark scenario. For example, an air compressor’s expected life will decrease by 20 percent if not maintained, and proper maintenance will cost $472 per year. If the company spent $236 (half the recommended amount) on compressor maintenance, the expected life would decrease by 10 percent instead of 20 percent.
Scenario 3: Industry Benchmark / Manufacturer’s Recommended PM
In this option, the model assumes that an organization spends the industry benchmark amount on preventive maintenance activities. This scenario also assumes that the equipment will last its full expected life and that energy performance will not degrade over the life of the equipment.
The cost consisted solely of energy, repair maintenance, preventive maintenance and equipment replacement. To calculate the cost of energy, the model assumes an average figure for annual operating hours and an average efficiency. In scenarios one and two, efficiency was degraded based on the amount of PM performed. The average life of each piece of equipment was used to determine when the equipment would need to be replaced.
For example, the average age of an air compressor in an organizations portfolio was 17 years. The expected useful life of an air compressor is 20 years, so in years 3 and 23 of the scenario 3 analysis, the compressor needed to be replaced. In scenario 1, the expected useful life of the compressor is 16 years, so it needs to be replaced in years 1 and 17 of the analysis.
Obviously, replacing equipment in later years is superior to replacing equipment in early years. In simplest terms, this represents the difference between spending, say, $10,000 today on new equipment or $10,000 ten years from now. Most companies would rather wait. Because of the time value of money, the net present value of spending $10,000 in year 10 equates to spending $3,800 today.
Which would a company rather do: spend $3,800 to buy a new piece of equipment or spend $10,000 to buy the same piece of equipment?
The analysis clearly indicates that the expense can be pushed out over time by properly maintaining the equipment.
All expenditures estimates are brought back to present value for each of the three scenarios for each piece of equipment. In each case, scenario 1 (no PM) was compared to scenario 3 (industry benchmark PM), and NPV and ROI were calculated. Scenario 2 (current PM) was also compared to scenario 3 to determine the effect of increasing the spending on preventive maintenance.
So what are the results & the ROI.
The results of the analysis comparing scenario 1 to scenario 3 (no PM to industry benchmark PM) were overwhelmingly positive for performing preventive maintenance. The analysis shows that an investment in PM not only pays for itself but also produces a huge return on the investment.
In one example, at the portfolio level, analysis based on an a 25-year cycle capital budget the results represented an ROI of 545 percent.
The bulk of the return came from increasing the useful life of equipment.
Energy savings account for typically 7 percent of the return. A 545 percent ROI seems like a huge return, and it is. Consider, however, the cost of just one piece of equipment: a chiller. The average size of the company’s chillers was 350 tons. At $1,000 per ton, chillers would cost an average of $350,000 to replace.
Maintaining the chiller costs $5,500 per year, and proper maintenance adds years to the equipment’s life, avoiding the extremely expensive capital outlay needed to replace it.
The longer the capital expense can be delayed, the higher the ROI.
Maintaining all the equipment in the portfolio produces the significant returns identified by the analysis and offers a powerful argument for the value of preventive maintenance and the dramatic impact PM can have on real estate operating costs.